Requirements and Procedure for Registration of Partnership Firms under Partnership Act | Law Optional Notes for UPSC PDF Download

Introduction

• Partnership is a relationship between individuals who agree to share profits of a business they conduct collectively or individually.
• Partners are referred to as individuals in a partnership, collectively forming a firm with a designated firm name.
• Registration of a partnership firm involves submitting a partnership deed to the registrar of firms, a process mandatory in Gujarat and Maharashtra.
• A partnership firm is registered with a state-appointed registrar of firms, varying stamp duties based on the state's regulations.
• The stamp duty is determined by the firm's capital, and partners must acquire the appropriate value of stamp paper.
• A registered firm is a legal entity requiring a minimum of 2 partners and allowing a maximum of 100 partners, with no specified minimum capital requirement.
• Upon dissolution, the entire firm is terminated, ending the partnership among all partners.
• If one or more partners retire or are unable to continue due to various reasons, the partnership between those partners and others dissolves.
• Dissolution involves reconstituting the firm, re-evaluating assets and liabilities, without necessitating the closure of business operations.

Partnership Firm Registration

• Partnership in business signifies an agreement between individuals to share business profits collectively or individually. Each partner contributes to the firm's operations, with the firm name representing their business entity.
• Registering a partnership firm involves formalizing the arrangement by submitting a partnership deed to the registrar of firms. While optional in most states, Gujarat and Maharashtra mandate registration. The state-appointed registrar oversees the registration process, with stamp duty varying based on the firm's capital.
• A partnership firm, once registered, gains legal recognition, requiring a minimum of 2 partners and accommodating up to 100 partners. Unlike corporations, partnerships do not mandate a minimum capital investment, allowing flexibility based on business needs.
• In cases of dissolution, the entire firm ceases to exist, ending the partnership among all partners. However, if specific partners retire or face incapacitation, their partnership with other partners dissolves, allowing the remaining partners to decide on the firm's continuity.
• Dissolution involves restructuring the firm, reassessing assets and liabilities, without necessitating the closure of business operations. It signifies a shift in partnership dynamics rather than a complete shutdown.

Steps for Registering a Partnership Firm

• Submit an application in the prescribed form to the registrar of firms, including:
  • Name of the firm
  • Location of the firm
  • Names of all business locations
  • Names and addresses of partners
  • Duration of partnership
  • Joining dates of partners
• All partners must sign the application.
• Deposit the required fee with the registrar of firms.
• Upon approval, the registrar issues a certificate of registration.
• Registration is considered complete when the application, fee, and necessary details are submitted. The registrar records this in the register of firms.
• Registration can occur even after a lawsuit is filed, but the suit must be withdrawn first, and a fresh suit can be filed after registration.

Registrar's Actions

• If the registrar confirms compliance with Section 58, an entry is made in the register of firms. 
• Failure to submit the statement within the specified time may lead to a penalty of one hundred rupees per year for delayed registration.

Establishment of Partnership Firm

To establish a partnership firm, a written partnership deed is necessary. While the partnership act allows for oral agreements, it is advisable to document the terms and conditions and register the partnership firm on a stamp paper. The partnership deed acts as the firm's constitution, defining the relationships between the partners and among the partners themselves.

Key Points

Partnership Firm Establishment Requirements:

• A written partnership deed is essential, although oral agreements are permissible.
• It is recommended to document terms and conditions for clarity.
• Registration of the partnership firm on a stamp paper is advisable.

Importance of Partnership Deed:

• Defines the firm's constitution.
• Establishes relationships between partners and within the firm.

Contents of Partnership Deed

• Name of Firm: The firm's name must be unique and distinct to avoid legal conflicts with existing trademarks. Avoid using certain words like King, Queen, Emperor, Royal, etc., or those suggesting government endorsement, unless officially permitted.
• Object of the Firm: Clearly outline all business activities that the firm will engage in within the partnership deed.
• Place of Business: Specify the firm's office address unambiguously in the partnership deed.
• Names and Addresses of Partners: List the names and addresses of all partners associated with the firm in the partnership deed.
• Date of Commencement: Mention the exact date when the business operations are scheduled to begin in the partnership deed.
• Duration of Partnership: The duration of a partnership is determined by the mutual agreement of the partners involved. As long as the partners wish to continue the partnership, they may do so at their discretion. Additionally, the partnership's duration may be tied to the completion of a specific project for which the partnership was established.
• Capital Contribution: The initial capital contributed by each partner is explicitly outlined in the partnership agreement. If all partners contribute equally, profits are distributed evenly among them. However, if a partner contributes more capital, they are entitled to a larger share of the profits compared to other partners.
• Profit & Loss Sharing Ratio: The profit and loss sharing ratio, as agreed upon by the partners, dictates how profits are divided among them or how losses are shared. Typically, partners who invest more capital are allocated a higher proportion of the profits.
• Rate of Interest on Capital Investment: It is essential to specify the rate of interest on capital investments, as well as the rate of interest charged on withdrawals. These rates should be clearly defined to avoid any misunderstandings among partners.
• Salary, Commission to Partners: The partnership deed must specify the salaries and commissions provided to the partners within the partnership firm. This ensures transparency and clarity regarding the compensation each partner is entitled to.
• Responsibility and Duties of Partners: Partners' responsibilities within a firm must be clearly outlined based on their designated departments to avoid role confusion.
• Method of Preparing Accounts and Audit: The procedures for preparing accounts and conducting audits should be explicitly documented in the partnership agreement.
• Rules of Death, Retirement, or Admission: Specific guidelines concerning partner death, retirement, or admission need to be clearly defined in the partnership contract.

Section 70: Penalty for Furnishing False Particulars

If the information provided to the registrar is incomplete and misleading, a penalty under section 70 can be imposed on the partnership firm for making a false declaration. This penalty may include punishment that can extend to imprisonment for 3 months, a fine, or both.

Consequences of Non-Registration of Partnership Firm

• Unregistered firms, according to section 69, are unable to file any case in court.
• Partners of unregistered firms do not have relief available for the set-off of claims.
• An aggrieved partner cannot take legal action against the firm or other partners if the firm is not registered.
• A third party has the right to file a suit against an unregistered firm.

Exceptions in which rights are not affected on non-registration of firm

• The partners retain the right to take legal action for the dissolution of the firm, settling accounts post dissolution, or realizing assets of the dissolved firm.
• Partners can claim a set-off or file a lawsuit if the claim value is less than one hundred rupees.
• Third parties maintain the right to sue a partner or the firm.
• The court-appointed receiver has the authority to release the insolvent partner's assets, and official assignees can initiate legal proceedings.

Case Laws

• Sharad Vasant Kotak & Others v. Ramniklal Mohanlal Chawda & Another: In this case, it was determined that the existing firm was reconstituted upon the induction of the second respondent, obviating the need for fresh registration. The suit was not affected by section 69(2A) of the Act, and the appeal was dismissed without cost implications.
• V. Subramaniam v. Rajesh Raghuvandra Rao, 2009: The introduction of Sub-section 2A of Section 69 by the Maharashtra Legislature was deemed unconstitutional, violating various articles of the Constitution. The appeal was allowed, the Bombay High Court judgment was overturned, and the suit could proceed disregarding the invalidated sub-section without incurring costs.
• Neelakantan Omana v. Neelakantan Raveendran: The legal suit by partners requesting account rendition is not valid if the firm is not officially registered.
• Oriental Fire & General Insurance Co. Ltd. v. UOI: Insurance claims linked to an insurance policy stem from the contract, making enforcement impossible if the firm lacks registration.
• Salem Chit Funds v. State of Tamil Nadu: The Madras High Court ruled that the annual declaration mandate for registered firms is legitimate.
• Gandhi & Co. V. Krishna Glass Pvt. Ltd.: If a partner's name is absent from the firm's register, any lawsuit by the firm will be unsuccessful.
• State Bank of India Vs M/s. Simko Engineering Works, 2005: A partnership firm lacks individual legal standing, implying joint liability for all partner actions. Section 20 governs exceptions to implied authority, which partners can modify through mutual agreements.

Basic Documents to start a partnership firm in India

Initiating a partnership firm in India requires the following fundamental documents:

• Proof of registered address
• Notarised partnership agreement
• Self-attested documents of all partners, including PAN card copies and photographs

Notary of partnership deed

Notarization of the partnership deed involves:

• Partners signing the agreement before witnesses and a notary
• Ensuring a well-drafted partnership deed

Foreign Direct Investment Restrictions in Partnership Firms

• Partnership firms only allow Indian citizens to become partners; foreign direct investment is prohibited in such firms.

Advantages of Partnership Firms

• Partners in a partnership firm are exempt from obtaining a Director Identification Number, unlike in private limited companies or LLPs.
• Unlike other business structures, partnership firms do not require a digital signature.
• There is no mandatory requirement for a text audit or balance sheet audit in a partnership firm.
• Partnership firms are not obligated to file balance sheets or final accounts.
• Partnership firms do not have a minimum paid-up capital requirement.
• Profits in a partnership firm are distributed directly among the partners.

Limitations of Partnership Firm

• Potential investors may hesitate to invest in partnership firms compared to private limited or limited companies due to concerns about the safety and security of their investment. They may be unsure about the level of risk associated with investing in a partnership firm, even after conducting due diligence. Additionally, if potential investors are not confident about achieving a high rate of return from investing in a partnership firm, they may be hesitant to invest in such entities.
• Partnership firms have the option to convert into private limited or limited companies if the partners are willing to do so and seek to attract more capital from potential investors.
• In a partnership firm, partners have unlimited liabilities. This means that if the firm takes out a loan or incurs any other liabilities, the partners are personally responsible for meeting these obligations. They may need to use their personal assets to cover such liabilities, as partners bear joint and several unlimited liability for the debts of the partnership firm.

Conclusion

• It is essential to verify the name of the partnership firm against the trademark registry to prevent any infringement of existing brand names or trademarks. All partners are required to sign each page of the partnership deed, with the final page being signed by two witnesses. Additionally, the Know Your Customer (KYC) details of the partners, along with the signed partnership agreement and proof of premises, are submitted to the relevant registrar of firms for registration.
• Although registering the firm from the outset is not obligatory, if partners decide to register the firm later on, they must file a statement in the prescribed form as per the provisions outlined in section 58 of the Indian Partnership Act, 1932. One partner cannot compel another partner to participate in the registration process; it must be a collective decision of all partners.